A top in new crop cotton? — maybe, maybe not

Market analyst O.A. Cleveland believes high prices could push U.S. cotton plantings to as high as 12.9 million acres this spring.
Dry soils still plague much of Texas, which makes abandonment just as important a factor as planted acreage.
Cleveland believes that Chinese mill consumption may have been understated by as much as 4 million bales.

USDA did a little more tinkering with world supply and demand estimates for cotton in its March report, but the net numbers were the same — very tight world supplies of 42 million bales.

This means the underlying fundamentals for cotton aren’t changing much, according to market analyst O.A. Cleveland, speaking at the Ag Market Network’s March conference call. “The cash market has continued to hold up very well, and consequently, futures will continue to remain strong. The old-crop, new-crop spread got out as high as 90 cents last week (early March), which is fairly significant. It tells us that the market is expecting a strong increase in production. In fact, it may be stronger than what the numbers are suggesting.”

Cleveland estimates that the acreage response to high prices could push U.S. cotton plantings this season to between 12.8 million and 12.9 million acres.

One factor that could affect U.S. cotton production is a dry weather pattern affecting much of the Cotton Belt, analysts say. “We’re getting to a critical period in west Texas,” said market analyst Mike Stevens. “They need several inches of rain and they need it quickly.”

Texas A&M University Extension economist John Robinson noted that short moisture convolutes the significance of the acreage number since there could be a high percentage of abandonment if rains don’t come.

Texas A&M Extension professor emeritus Carl Anderson said the response of Southern Hemisphere cotton producers to high prices is something to watch as well. “Argentina, Australia and Brazil are expected to produce 14.5 million bales, a 75 percent increase from the 8 million bales they produced in 2009-10. It is an indicator that high prices do have the attention of producers. Other countries could easily come up with a 10 percent increase in production.”

Anderson is also concerned that high prices are becoming a negative for cotton demand. A significant drop off in consumption could add 10 million bales or more to world carryover. “We have to be real cautious. These prices may not stay above $1.30 for very long.”

Meanwhile, a volatile market is keeping marketers on edge, according to Anderson. “Forward contracts are going to have tight stipulations with them. With the dry weather and risk to production, it takes out the forward contract for a lot of Texas dryland producers. It puts a lot of emphasis on pools and marketing associations. They’re not likely to give you the highest price, but they’re not going to give you the lowest price.”

Analyst Mike Stevens says producers should have priced at least 25 percent of their cotton at $1.30 or above. In the intermediate term, Stevens sees new crop cotton at $1.15 on the downside to $1.35 on the upside. Longer term, cotton prices could range from $1.45 to $1.50 on the upside to $1.05 on the downside.

Anderson is a little more bearish. He doesn’t see much variability in the near term, “But at harvest time, I’m looking at a low of 85 to 90 cents a pound. Anything above $1.40 would require something unusual happening in the marketplace. Growers should have half their cotton priced at $1.25 to $1.30, if they can do so.”

Cleveland sees a range of 95 cents to $1.45. “I’m probably more bullish than Carl on demand. The U.S. consumer has not abandoned the market. We sold 500,000 bales in the export market last week, a huge sale.”

Cleveland believes that China is spinning a lot more cotton than it’s letting on, by as much as 4 million bales over what USDA is currently estimating.

Cleveland is still very bullish on old crop cotton. “We never know what is going to happen when we have a natural disaster like we’re seeing with the earthquake and tsunami in Japan, but they tend to take the market lower initially, before the market springs back.”

Cleveland noted that in early March, call sales comprised most of the open interest in July futures, meaning there will be a lot of buyers who have to buy the market whether they want to or not.

“I think we will take the May and July (old crop) futures back up above $2, although whether it will attain previous highs of $2.17 is an entirely a different story. I’m positive about new crop, and I would do some pricing of new crop at $1.30. As we look at crop conditions around the world, there will be tremendous pressure to produce the yields we are accustomed to. I think growers should do significant pricing on any return to $1.30.”